For years, credit card debt and debt in general has been on the uptick. In 2017, the average household had $15,482 in credit card debt, a 5% increase from the previous year. Overall the average household had more than $130,000 in debt. While debt is a part of life, it can quickly become overwhelming and financially crippling.
While there are many ways to pay down debt, one strategy is to combine many old debts into a new single loan or credit card. By consolidating debt, payments are often much more manageable, making paying off your debt a lot less of a hassle.
Keep reading to learn about the benefits of debt consolidation and three ways you can combine and tackle your debt.
Benefits of Debt Consolidation
There are many advantages to using debt consolidation. One of the biggest benefits is that with a new loan or credit card, you’ll likely pay a much lower interest rate compared to your existing rates. You may even get approved for a 0% APR credit card which means all of your payments go towards the principal balance. This saves you money and allows you to pay off your debt quicker.
Another benefit is that you don’t have to worry about paying multiple lenders are different times throughout the month. Keeping up with several different payments all due on different days and different amounts can be difficult. With debt consolidation you only have one payment.
Other advantages of using debt consolidation include:
- Improved credit score
- Debt repayment plan
- Lowered risk of late fees
By using debt consolidation you can quickly pay down your debt and be even closer to financial security.
Ways to Consolidate Debt
There are many different ways to consolidate your debt into a single location. Here are three of the most effective options for consolidating debt from loans and credit cards.
1. No APR Balance Transfer Card
With a 0% balance transfer card, you can make interest-free payments for a set promotional period. Most credit card companies offer anywhere from 12 to 18 months to pay off the balance in full before an interest rate comes into play. By using this type of card, you can transfer multiple balances onto it.
The catch with this option is you must have a great credit score, usually above 690. You must also have a strict payment plan to ensure that you pay off the entire balance before the promotional period ends. Otherwise you’ll pay interest on the remaining balance.
Another detail to keep in mind is a balance transfer fee. Most credit card companies charge around 3% while others have no transfer fee during the promotional period.
With this option you can save a lot of money on interest but you must develop a payment plan and stick to it.
2. Home Equity Loan
If you own a home and have strong credit and a sound financial history, you may be approved for a home equity loan. With this debt consolidation option, you’re able to use your home’s equity to pay off debt. Home equity loans typically offer low interest rates and offer large loan amounts when compared to other debt consolidation options. In most cases any interest you pay is tax deductible.
Because home equity loans have longer repayment periods, your monthly payments will be lower though you’ll pay more towards interest over the life of the loan.
What’s important to know about this debt consolidation option is that you must use your home as collateral. This means that if you default on the loan, you could lose your home. You’ll also want to find a loan that offers a non-variable interest rate.
3. Personal Loan
Sometimes called a signature loan, a personal loan offers equal monthly payments. These loans are unsecured loans and the amount and interest rate that you’re approved for greatly depends on your credit score and history. Most lenders offer up to $10,000 in personal loans.
When using a personal loan as a way to consolidate debt, it’s important to shop around. Be sure to understand the loan terms and fees to ensure that you’re choosing the ideal loan. One of the most important things to do is to read the fine print; otherwise, you may be stuck with high fees and variable rates that can put you into a financial bind.
With personal loans you don’t have to put forth any collateral. This is an effective option for those who don’t own a home but want to consolidate their debt.
Debt consolidation is a great way to pay less interest towards debt while also paying off your debt more quickly. Consider these three options if you’re ready to start tackling your debt once and for all.
If you have any experience with consolidating your debts, share a comment with your best tips and advice in the section below.